Alan Sacks of Herzog Fox & Neeman looks at the current environment for corporate work in Israel
Israel continues to see a significant level of M&A activity, primarily in the technology sector, where Israel remains a world leader, but also in more traditional areas of the economy. In addition, we have seen in recent months a revival of IPO activity on the part of Israeli technology companies, in particular on Nasdaq. On the other hand, Israel has seen in recent months a number of significant corporate insolvencies.
The concern in recent years that the Israeli economy is too concentrated in the hands of a relatively small number of corporate groups that have borrowed too much and too easily, has led to a series of legislative measures aimed at protecting public funds, promoting competition and guarding against a “crash” in the local economy.
In light of difficulties encountered by a number of large corporate borrowers, Amendment 18 to Israel’s Companies Law was enacted, which provides that as soon as negotiations begin between a company and its bondholders with a view to reducing or rescheduling the indebtedness, the trustees of the debentures (and if there is no trustee, the company itself) must apply to the Court to appoint an expert to examine any proposed arrangement. The expert will report on the fairness of the proposed arrangement, and on whether any alternative arrangement would better protect the interests of the bondholders.
Amendment 19 to the Companies Law addresses company rehabilitation and incorporates into law principles established over the years by the courts, as well as a series of new provisions similar to Chapter 11 of the US Bankruptcy Code.
At the heart of the corporate rehabilitation process introduced by Amendment 19 is the ability of the Court to grant a stay of proceedings (a 'Stay Order') for a period of up to nine months, renewable for successive periods of up to three months, the purpose of which is to give a company in financial difficulties a period of time to rehabilitate the company's business under the supervision of the Court.
The Court will appoint a 'Authorised Person' to implement the recovery process. The Authorised Person may raise new finance for the rehabilitation of the company and may sell or pledge assets of the company, even assets subject to an existing charge or retention of title arrangement, if this is necessary for the rehabilitation of the company. The secured creditor/owner must have "adequate protection" (a key concept introduced by the Amendment) from the asset itself or a replacement asset, or from the proceeds of sale.
If a company is subject to a Stay Order, utility providers (e.g. water, electricity) must continue to supply those utilities notwithstanding past unpaid debts. The Court is also authorised to direct the provider of a "vital service or commodity" to continue to provide that essential service or commodity, provided that it will be paid for. A party to an existing (executory) contract with a company subject to a Stay Order may not cancel the contract by reason of the insolvency of the company, even if the contract specifically provides for this. The Authorised Person may elect to adopt the existing contract, whichever is necessary for the rehabilitation of the company, subject to the approval of the Court.
A committee established by the Ministry of Finance and the Bank of Israel has recently published its interim recommendations aimed at ensuring that companies anticipating financial difficulties take steps to remedy the situation at an early stage, long before debt default or insolvency.
The long-awaited Law for the Promotion of Competition and Reduction of Concentration was finally published in December 2013. Two of the primary areas of focus of the Concentration Law will have a significant influence on commercial activity in a wide array of business sectors.
The first of these is the limitation on corporate “pyramid” structures having more than two layers of reporting companies (essentially, a company that has offered shares or debentures to the public). There is an exception when the uppermost reporting company in the pyramid has no controlling shareholder, in which case the new Law allows three levels of reporting companies. The Law allows a six-year transitional period for holding a third layer of reporting company and four years for a reporting company below this level. During this interim period, various rules will apply regarding the composition of the board of directors of any third layer of reporting company or below. These rules may result in the top levels of a reporting company losing control of lower level companies, which may have significance for agreements that contain a “change of control” provision.
The Concentration Law calls for a separation between Significant Real Entities (an entity which is not a Financial Entity whose group turnover or group debt exceeds NIS6 billion ($1.6 billion) (NIS2 billion if the Real Entity has been declared a non-financial monopoly under certain conditions), and Significant Financial Entities (defined as a company managing a provident or pension fund, a mutual fund manager, an insurer, a banking entity and so on, whose group assets exceed NIS40 billion).
• A Significant Real Entity or a party controlling such an entity may not control a Significant Financial Entity or hold more than 10% of the means of control of a Significant Financial Entity. In certain situations, this level is reduced to 5%.
• A party holding more than 5% of any means of control in a Significant Real Entity may not control a Significant Financial Entity.
• A Financial Entity may not hold more than 10% of any means of control in a Significant Real Entity.
• Special rules apply to banking corporations.
New rules are introduced to prevent conflicts of interest, by ensuring that the same individuals do not act as directors of both a Significant Real Entity and a Significant Financial Entity.
There are likewise a number of detailed transitional periods for the above rules.
The Securities Authority continues to strengthen the rules for proper corporate governance with a variety of regulations, including increased penalties for directors and officers of offending companies.
Herzog Fox & Neeman